Why you should credit check your customers and suppliers?

Paul Smitherman |

Safeguard your organisation by gaining insight into stakeholder creditworthiness before contracts are signed. Get a reliable picture of the financial status of any business partner. Target the right prospects who are most likely to become fast-paying customers and ensure more reliable cash flows.

Unpaid invoices and overdue payments are on the increase with companies waiting to be paid on average up to 72 days according to recent research. The lifeline of B2B sales is based on credit and in many cases payments are late, leaving you with no choice but to pay your own suppliers late because of your own financial management issues .

Delays in payments cause problems that can affect your company’s performance and typically generate several weeks of administrative work chasing outstanding payments. This in turn affects your own cash flow and your ability to plan ahead.

Often credit is awarded based on the creditworthiness of the worst customers since these are most sensitive to financial changes and failures in trade. In these situations, it is important to have a reliable credit system to detect and monitor their creditwothiness at all times.

Sustainable businesses are normally the ones that extend as much credit to their customers as they are able to pay back. The challenge is figuring out how much credit you can afford to offer and at the same time reduce your exposure to risk.

Your supply chain matters

On the flip side through your supply chain you need to guarantee uninterrupted service to your customers, particuarly where you are dependent on specific providers delivering goods or services critical for your operations.

For example you need to avoid delivery delays or suddenly having to look for a new provider with same quality goods that has immediate capacity to deliver. Where you are regularly dealing with one-off suppliers or depend on a specific supplier to run a dedicated production line in order to supply its own customers, uninterrupted service is critical to your ability to deliver successfully.

For this reason, assessing and monitoring risks associated with critical providers in terms of financial health and business sustainability is the best way to guarantee a safe and continuous service.

Obtaining a reliable financial health check of your business partners

There are some basic measures you can undertake to safeguard your organisation by gaining insight into the creditworthiness of your clients, suppliers and other stakeholders before signing any contract.

Obtaining a business report from a reputable credit bureau such as Dun & Bradstreet (D&B), Creditsafe, Coface Central Europe, CRIF Bürgel, Creditreform is typically the fastest way to get a reliable picture of the financial status of any business partner.

These reports allows you to easily gain insight into your business partners‘ corporate identity, legal status and the individuals responsible for the relationship as well as maintain up to date invoice and contact details.

Most business reports include a credit score that summarises an organisation’s viability and warns about business risks to aid fully informed decision making.  For this credit bureaus use different weighting systems and statistical methods to consider specific characteristics that impact in the business performance, such as company size, demographics, ownerships, public information records, financial data, industry analysis and county court judgements. They then deliver a global risk score that typically correlates low levels of risk to become insolvent with highly creditworthiness.

From this you get credit limit recommendations indicating the total amount of credit that should be outstanding at any one time. This figure is typically calculated by the credit bureau and is based on key balance sheet figures such as last disclosed turnover or asset values, as well as specific industry data, especially in the case of companies without available balance sheet figures.

By determining the creditworthiness and credit limit of your customers a high ROI can be measured by targeting the right prospects who are most likely to become fast-paying customers and therefore bring more reliable cash flows.  At the same time you can ensure continuity of your own supply chain and fulfillment of SLAs by monitoring the creditworthiness of key providers and have the ability to react quicker in the case of foreseeable delivery disruptions.

Monitoring your existing customer and suppliers

You’re often working with a considerable number of customers and suppliers and it can be challenging to oversee all of them at once. All reputable credit bureaus enable you to monitor a company‘ credit activity such as rating and limit recommendations via your own website platform. Adding your key accounts to a monitoring list enables you to receive notifications of any changes in their financial status so you can react quickly before it is too late.

Monitoring industry standardard payment models with payment pools

Some reputable credit bureaus such as Dun and Bradstreet (D&B) and Creditreform also provide free payment performance data which indicates the number of days that a company takes on average to pay its bills. This data is collected from shared invoices of companies participating in an information pool and is updated on a regular basis.

In this way, companies taking part and sharing their own data can easily compare their own number of days of outstanding payments with data from other pool participants and benchmark industry average in order to understand when a negotiation to reduce payment terms can be successful. This also alerts them to information on payment disruptions to other pool members.

Next steps to solve these challenges

Whether you‘re an SME or a large corporation, facing the complexities of processing large amounts of credit data from different sources can be daunting, whether through monitoring services or different web platforms. However there are software solutions on the market that seamlessly integrate with your own corporate enteprise systems and connect to the major credit bureaus in real time.

In addition to data processing these software solutions enable the central storage of massive amounts of data in structured form and let you do cross-analysis of credit reporting data with your corporate data.

These solutions also give you the capability to configure early warning systems based on free definable tolerances, for example when a report update is being delivered by any assigned credit bureau and the scoring has dramatically been changed.

Within SAP, a very well established SAP solution on the market is Credit Management Suite which offers a dynamic SAP Platform as a single point of contact to reputable global credit bureaus through its SAP AddOn component CGsprint. CGsprint helps you to easily identify potential risks and gives a visual and transparent view of your business partners. It automates credit monitoring and frees up credit managers and purchase directors from administrative work to focus on analysis and detecting business opportunities.

This solution can be used as an unique module and can set the foundations of a complete professional credit management suite using a range of other modular sprint software components that include useful resources such as the assessment of your own risk data like payment history, sales forces surveys, collateral, credit insurance, factoring, disputes and collection processes.

Bridgestone credit management